Macroprudential policy, financial risk and innovation: Cross country evidence

Abstract

Macroprudential policy aims to reduce systemic financial risk and ensure financial market stability, making it an important factor influencing national innovation development. Existing research primarily focuses on the effects of innovation policies or financial policies, while the impact of macroprudential policy on innovation has been largely overlooked. Using cross-country panel data from 63 countries between the years 1990 and 2021, this paper pioneers the exploration of the impact of macroprudential policy on technological innovation and the channel of financial risk. This paper documents the strong evidence that the implementation of macroprudential policy can significantly promote technological innovation. After the execution of several robustness test procedures, such as using alternative dependent and independent variables and different empirical strategies, the significant effect of macroprudential policy on innovation remains robust. In addition, the implementation of macroprudential policies can promote innovation level significantly by reducing financial risk. Last but not least, this paper finds that the significant positive impact of macroprudential policy on innovation exists in non-OECD countries and the Emerging Market and Developing Economies (EMDE) but not in OECD countries and the Advanced Economies (AE). These insight can aid policymakers in designing more targeted macroprudential measures that support both financial stability and innovation.